What to Look for When Investing in a Business

Especially for first-time investors, it can be a scary plunge to start investing your money in other business endeavors. It could pay off big for you, but there is also always the risk of losing everything you put in. While it’s never a guarantee, the more research you put into the company before investing can help mitigate your risks. Here are five critical areas to investigate when you are considering investing your money in a company.

Management Team

Having a solid and experienced management team in place can make or break a company. Especially look at the CEO or President. Most growth funders want to see a management team that is cohesive with a strong (not arrogant) CEO at the helm. Look for a team that has worked together on other projects or has been together for a long time. Keep a wary eye out for backbiting or strife between team members. You’re looking for a team that can put aside their egos and work together to achieve the common goal of making the company successful.

This may sound cheesy but look for a CEO that you can connect with. This usually means at least a phone or teleconference with the CEO or perhaps an in-person meeting. Generally speaking, investing in a company means you are becoming a business partner (if you are getting stock in exchange for your investment) so it is essential that you know you can communicate and have some of the same values and vision.

Market Opportunities

No matter how fantastic the idea, if the market isn’t big enough you probably won’t get a significant return on your investment. The market for the product or service needs to be big enough for the company to have substantial room to grow. Usually, this means the company has national or even international potential. Ask questions and research the opportunity for market growth. Understand who the competitors are in the current market and what it is going to take to increase market share.

Growth and Risk

Alongside considering where a company can grow in the future, it is also vital to make sure the infrastructure is there for the future growth. It can be very risky to grow too quickly without the right foundation in place. Ask questions to understand how well the management team has considered the growth potential and the steps needed to mitigate the risk of growing too quickly. Look to make sure the team has thought through and set the right pieces in place to support rapid growth.

Exit Strategy

It is critical to know what the management team sees as the exit strategy for the company. Will it go public? Or is the goal to be acquired? You want to know what the time frame is going to be and decide if that is going to work for you. Some industries are more prone to certain types of exit strategies. For example, mergers and acquisitions (M&A) are more common in the consumer industries as opposed to tech industries where going public is more the norm.

Financial Performance

Of course, no list would be complete without the financial piece. It is essential to take a look at the following components of any company you are considering investing in.

Of course, no list would be complete without the financial piece. It is essential to take a look at the following components of any company you are considering investing in.

Revenue: Look for a revenue line that is trending upward over the last few years or at least holding steady.

Net Income: Growth in net income from year to year is important. It shows how to make adjustments as needed to keep their bottom line growing.

Profit Margins: Again, look for steady growth, which indicates that a company can manage its operating costs and reward shareholders with returns.

These are not an exhaustive list of what an investor should be watching for when investing in a company, but we hope it is enough to get you thinking. Investing is an exciting yet high-risk endeavor so the more prepared and knowledgeable you are the better your chance of investing in a company could pay off.

Top Questions Investors Ask Part 4

“People who ask confidently get more than those who are hesitant and uncertain. When you've figured out what you want to ask for, do it with certainty, boldness and confidence. Don't be shy or feel intimidated by the experience. You may face some unexpected criticism, but be prepared for it with confidence.” Jack Canfield

Being prepared can help you answer investors’ questions with confidence and certainty. This is the last in our four-part series of common questions investors can ask. While this is not an exhaustive list, we hope that it will help you be better prepared to ask for what you want with confidence. Today we will cover intellectual property, financials, and your financing round.

Your Intellectual Property, Patents or Trademarks

The intellectual property (IP) of your business can include trademarks, patents, copyrighted designs, and confidential information. Your company’s IP is extremely valuable; they can set your business apart from competitors, be used as security for loans, provide a revenue stream if sold or licensed, and can be an essential part of your branding and marketing. Here are some of the questions you may get about your company’s IP.
• What key IP does your company have?
• How was your company’s IP developed?
• Can the IP be liquidated?
• Are you looking at infringing on the IP of another company?
• Would acquiring IP from another company add value to your company?
• What proof or confidence you have that your company’s IP does not violate the rates of a third party?
• Is it possible that any prior employers of a team member have a potential claim your IP?

Your Company’s Financials

When you get to this stage, be prepared to walk an investor through your financials including your profit & loss statement, balance sheet, and financial model. It isn’t uncommon for an investor to request a special session for the financials and bring an analyst with them. Here are some questions you might get asked.

Which key metrics does your leadership or management team focus on?

Are there factors that have been or will limit faster growth?

How much burn do you expect to happen until the company achieves profitability?

Are you setting aside a stock option pool for employees?

What is the capitalization structure? How much equity and debt has the company raised?

What are the company’s three and five-year projections?

What key assumptions lead you to your projections?

When do you expect the company to be profitable?

Your Financing Round

This group of questions helps the investors get a better idea of who the other players are. They want to know how much money has already been raised (if any) and where it came from. Knowing what the equity structure looks like is usually a key component.

What will the proceeds from this round go to?

Are there existing investors and will they participate in this round?

Which round of funding is this?

How much funding are you looking to raise in this round?

Who holds equity and how much do they hold?

Have you done crowdfunding before?

Has anyone else invested in this round?

Has an accelerator or incubator already committed funds?

Does your company have any convertible loan notes?

What is your company’s desired pre-money valuation?

While it’s natural to be a bit nervous when pitching new investors, the best thing you can do is to be as prepared as possible. While our series is not an exhaustive list of possible questions, it can be an effective tool. Making sure you have answers to the questions in our series is a great place to start. We even recommend you take some time and practice answering the questions. As Jack Canfield says so well; prepare, prepare, prepare so you can ask for what you want with boldness and confidence.

Preparing to pitch investors can be intimidating but understanding the questions most likely to be asked can help you overcome your nerves. This is the third article in our series about questions investors commonly ask. Today we will cover traction and early adoption, any downsides or risks, and your exit strategy. These questions don’t represent an exhaustive list but can give you an idea of where you might need to spend some more time preparing.

Does Your Company Have Traction?

Traction can take many forms that can vary based on your business type. Having early traction of some kind can put you in a more favorable position with investors.

How many users or customers do you have?

What is your average churn rate?

What do you attribute the early traction to?

Do you have plans for accelerating or building on your current traction?

How many downloads, subscriptions, likes, shares, or sign-ups do you have?

Do you have any celebrity endorsements?

What is your social impact?

What is your engagement on social media?

What are the Downsides, Risks, or Threats?

Starting or growing a business of any kind is inherently risky, and there are always threats of some kind to consider. Investors are usually asking the following questions to test your tolerance for risk and your sense of where your business and the marketplace really is.

In Your Opinion, what are the principal risks in this business?

Do you have any legal risks?

Are there product liability risks?

Are there regulatory risks in your industry or specifically with your product or service?

Is there the capacity to distribute risk across your team?

Is there an Exit Strategy?

Investors are looking to make some money as well as being part of something they believe in. Therefore, they will want to get a feel for how and when they will be able to exit and earn the return on their investment.

Do you anticipate going public with an IPO or going the merger and acquisitions (M&A) route?

If you got the M&A route, who will be the likely acquirers?

Considering the given market comparables, how will valuation of an exit be determined?

Do you have any similar examples?

Financially, where do you see your company in five years? Where do you see yourself in five years?

When do you see this exit transition happening?

Some of these questions may really make you stop and pause. That can be a good thing. It’s important to think through some of these tougher questions you may not have considered before and know where you stand. For more preparation questions you can check out part 1 and part 2 of our series of articles. Next week we will be looking at the final three areas of questions: financing round, financials, and intellectual property.

Katie Talati is the Head of Investor Relations at Crowdfunder, Inc. where she focuses on developing relationships with investors in all aspects of the Crowdfunder business. This includes investors on our platform, limited partners in our venture fund and our investors for Crowdfunder Inc.. During her time at Crowdfunder, she has reviewed hundreds of startup pitches and developed a deep understanding of the crowdfunding industry and its surrounding regulations. She is also the senior analyst for our VC Index Fund and is an associated person with CFI Securities (broker-dealer) as a registered representative.

Katie Talati began working at Crowdfunder nearly three years ago at the company’s early stage. She likes the fast-paced nature of the startup space, where she gets to work on different tasks every day. Katie believes:

“Beyond traditional benefits, startups offer the chance to learn far more than working at a large corporation. You’re not given the same thing to work on every day. They also allow employees to have a great work-life balance.”

When Katie started at Crowdfunder, she found herself working on various projects in a few different areas. Management recognized her exceptional leadership skills and within a few months, she was promoted to project manager. When the team introduced Crowdfunder’s portfolio platform, Katie assumed her current role as Investor Relations Manager.

According to Katie, working in Investor Relations at Crowdfunder is different than working the same position at banks and private equity firms. At more traditional financial services firms, Investor Relations is limited to managing relations with a list of investors. At Crowdfunder, Investor Relations focuses on the product side. A big part of her role involves speaking with investors on the platform about their user experience. This involves patience and communication.

Katie did not originally have a finance background, but she learned quickly.

“I studied Communications and Global Studies at UCLA. Although I didn’t start out in Finance, I was able to use my strengths as a communicator to manage company Investor Relations. I’ve taught myself fundraising and finance terminology, and at the end of the day, my investors are my clients. I go above and beyond for them. I believe you should be personable and dedicated in whatever position you hold. I try my best to connect with investors and find out what each client likes to invest in. Learning why an investor is excited about a specific company helps me create individual relationships. People remember you if you help them.”

Being a female leader at a financial company is rare. Katie remarked that although she is highly qualified, she has experienced others doubting her capabilities due to her gender and age.

“I have had people ask me questions trying to gauge my age. I have also had people turn to my male coworkers instead of me in meetings. That can be frustrating, but I choose to continue to work hard and hope that people will see past those things. On the other hand, I have had many positive experiences with investors who don’t share those biases.”

As a financial tech company with a female-majority team, Crowdfunder breaks the mold in terms of gender equality in the workplace. When our current president Steven McClurg joined the team, he instituted equal and transparent pay. According to Katie:

“Steven refreshed how things are done. He values communication and gave me a lot more responsibility. As a woman early on in my career, that has been invaluable for me. I now manage our VC Index Fund, which includes performing diligence on prospective investments, running financial models and reporting. The work is high level, but it’s been rewarding. I now have important skills that will help me at any future position.”

Due to her success in her current role, Katie was given the opportunity to become a licensed representative of the broker-dealer. This license makes her an invaluable asset to our company’s growth. When asked about the future of her career, Katie said:

“At Crowdfunder, I’m able to see the results of the work I put in with entrepreneurs and investors. Our original mission statements centered upon making a positive economic impact on the U.S.. I believe Crowdfunder has made that impact and will continue to make that impact in the years to come. When our company started, we were only a few years over the market crash, and the job economy was unstable. Several years have passed and conditions have improved, but there’s still more that can be done. I really enjoy the hands-on aspect of working at Crowdfunder and feel like we are working to make a difference.”

We are lucky to have such a strong leader on our team. As Crowdfunder grows, we can’t wait to see what new challenges Katie will take on.

Crowdfunder, Inc. and its affiliates disclaim responsibility for any statement by any of its employees. The views expressed herein are those of the individual and do not necessarily reflect the views of the company. This post may not be reprinted or disseminated without our written permission.

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